Dr. Copper doesn’t always get the diagnosis right

The copper price has come under heavy pressure in the last few months. Compared to its summer high it has slumped by around 16% to USD 6,200 per tonne. Since copper is used in many very different sectors, such as for example electrical engineering, the construction industry and telecommunications, “Doctor Copper” is deemed to be a leading indicator for economic growth. Such a price slump therefore attracts a lot of attention among investors.

Dr. Copper really does function as a leading indicator, but at the moment we doubt whether the diagnosis of the state of global economic health is correct: in our view the significant price correction is mainly due to the trade dispute between the USA and China and the resultant anxiety that Chinese demand for copper could possibly weaken significantly. As China accounts for more than 50% of global demand, it comes as no surprise that especially large speculative investors have been selling copper, which has pushed the price down. However, demand has not weakened in China. Falling stocks and the rising copper premiums that have to be paid for physical delivery are both signs of very robust demand in the Middle Kingdom. So the market’s fears have been highly exaggerated. The market is now beginning to realise this and a slight price recovery is already underway.

But at the global level, too, the fundamental data have not changed much: for example, stocks registered on the London Metal Exchange have been falling for some time now, which tends to indicate that the situation in the market is tightening. For the coming year the International Copper Study Group (ICSG) even expects a market deficit (demand greater than supply). Given the solid fundamental starting point we expect that the copper price will continue its current recovery. In addition, there is also still the joker that there could be at least a rapprochement in the trade dispute between the USA and China after the US Congressional elections.

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